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A Bad Credit Score Affects A Lot More Than Credit

Okay, so maybe you pay cash for everything, use a debit card and don’t even have a credit card. You laugh at your bad credit rating.

But one’s creditworthiness, as reflected in a FICO score or a credit report, now affects a lot more than the ability to borrow money or buy something on credit. It can affect whether you get a job, what you pay for insurance, and even how your personal relationships work out.

You may think that the current economic mess and mortgage foreclosure crisis generating an overall decline in credit scores will lower the bar for you compared with others. Think again. Low credit score or not, your credit score can affect you on many new fronts.

Although there are different varieties of credit scores, the most widely used one is called FICO, named for its inventor, Fair Isaac Corp (NYSE: FICO). It considers such factors as credit account payment history and borrowing capacity–but not age, income or net worth–to calculate a single number called a FICO score. It can range from 300 to 850. Anything above 750 is considered excellent. Below 550 is trouble.

A credit rating is drawn from a credit report, a compilation by a credit reporting agency of your debts, payment history and other information such as employment and addresses.

At its heart, a credit score is nothing but a mathematical prediction of your ability to pay your debts. But it can also impact other areas that may not be as obvious.

It’s legal under the Fair Credit Reporting Act for a would-be employer to look (with your permission) at your credit report and reasonably use that in the hiring or non-hiring decision. Employment consultants say a troubling credit score may cause hiring officers to more closely question an applicant. Vic Tanon, chief simplicity officer at Emplicity, an organization that consults in hiring practices across the U.S., says a bad credit rating is likely to be more of a factor in certain industries like financial services.

There is also advice out there that two people contemplating a permanent relationship should consider credit issues. “Sitting down and looking at each other’s credit reports and seeing what that says about each other is an important step before getting married,” says Lisa J.B. Peterson of Lantern Financial, a Boston financial planning group. “Risky versus debt-averse personality types that show up in credit scores may paint a pretty good picture of how each person will act in the marriage. It comes down to communication, but that can be really challenging if the personalities are so different.”

New York City matrimonial lawyer Sheila Riesel says one of the main concerns with poor credit scores prior to marriage is what it says about the borrower’s behavior with credit. People often wait too long to discuss these issues, and it ends up adding to one or another’s stake of assets in a divorce settlement. “People’s actions impact the way that assets are divided in a divorce,” she says.

One detrimental effect of the bank crisis three years ago is tightened credit standards among regional banks have reduced access to capital for small businesses. Today a bad credit score can make it even harder to get bank financing for starting or expanding a business. “A credit score figures more heavily today in an individual’s ability to finance a business than it did five years ago when banks had more freedom to lend,” says Giovanni Coratolo, vice president of business policy for the U.S. Chamber of Commerce.

Financing a home continues to be impacted by a borrower’s credit history. With the new laws passed in the Dodd-Frank financial overhaul bill last year, the holder of a low credit score is really shut out of the market today unless a large down payment can be ponied up.

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Your credit history accounts for 35% of your credit score. Being delinquent can severely affect your credit score. The severity of delinquency on your score and your report varies with what you’re delinquency is from. Being delinquent on a mortgage is the most severe. If you’re 30 days late on your mortgage payment, it can lower your score by 110 points and it can take as long as three years before your score recovers fully.

Negative items on your report can stay on your report for up to seven years, with a bankruptcy clinging on for up to 10 years.

Paying on time is critical to having a better credit score. Mortgage lates are the worst thing to happen to your score. Another factor is the difference between the balance on your credit card and the limit of your credit card. The higher this margin the better